The Labor Market: A Top Industry Concern
How healthy is the US labor market? On the surface, the December employment report released in early January looked strong. Headline job growth of 216,000 is a robust figure that exceeded the Bloomberg consensus estimate of 170,000. The unemployment rate held steady at 3.7% and average hourly earnings surprised to the upside, growing 0.4% month over month and 4.1% year over year, relative to expectations of 0.3% and 3.9%, respectively.
However, there were also potential causes for concern. Some commentators focused on revisions to previous months, which lowered November net job gains from the initial estimate of 199,000 to 173,000 and October from 150,000 to 105,000, a cumulative decrease of 71,000 jobs from initial estimates. Additionally, job growth was concentrated in particular types of work in 2023. Three economic sectors accounted for over 80% of the net job growth for the year, calling into question the breadth of the labor market’s strength.
In our January Labor Market Insights report,Labor Market Insights, NCCI, January 5, 2024. we remained upbeat about the health of the labor market following the December employment report. In this paper, we will discuss the reasons for our relatively favorable view, detailing the evolution of the labor market in 2023 and why we remain positive on the labor market and the economy heading into 2024.
A Transitional Year for Employment
In 2023, the economy added a net 2.7 million jobs. This is a significant slowdown after 2021 and 2022 saw net job gains of 7.3 million and 4.8 million, respectively. But these years’ growth partially reflects a bounce back after the economy lost 9.3 million jobs in 2020. In the five years prior to the pandemic, the economy added an average of 2.3 million jobs per year. As we entered (or at least approached) a “new normal” in 2023, it was natural to expect employment growth to slow back towards a steady-state pace. Indeed, we expect that employment growth will continue to slow in 2024 as the labor market continues to approach a more balanced state of supply and demand. But that slowing is not necessarily a bad thing.
In 2023, there were numerous downward revisions to employment data, but we do not view this as a major indicator of labor market weakness. Establishment survey data from the monthly employment report that the Bureau of Labor Statistics produces is notoriously prone to near-term revisions. Since more accurate employment counts are not available until multiple quarters later, we accept the inadequacies of the survey data to gain a real-time assessment of how the economy is evolving.
While 2023 revisions have mostly been in one direction (down), post-revision data remains consistent with the story of a labor market that has mostly recovered from the pandemic and is experiencing slower, steadier growth. On average, the initial labor market reports in 2023 overestimated employment growth by about 37,000 jobs per month. Had the initial print been correct throughout the year, 2023 would have seen a net gain of 3.1 million jobs, indicating an even stronger labor market than already suggested by the 2.7 million adds. In 2022, initial estimates underreported net gains by 14,500 jobs per month throughout the year. Overall, the differences between initial and revised survey estimates remind us not to overreact to any individual jobs report. Over a period of several months or a year, revisions very rarely change the basic story of what is occurring in the labor market.
To further assess the durability of the labor market as we head into 2024, it is helpful to look at the industry-level trends in employment in 2023. Last year’s employment growth was not broad-based. Instead, just three industry groupings—education and healthcare, leisure and hospitality services, and government—accounted for over 80% of all employment gains.
At a quick glance, this view of the labor market picture in 2023 might look worrisome. Most industry groups saw little gain in employment while a few experienced outright declines. As with most assessments of the economy in the post-COVID era, more context is needed here.
As the title of this section suggests, 2023 was a year in transition for the economy as well as for most industries. The “stay at home” economy of 2020 and 2021 transitioned into the “make up for lost time” economy of 2022 and 2023. Many households that were spending money on delivery of retail goods, home improvements, and streaming services started spending on travel, leisure, and other services that were either forgone or delayed during lockdowns. Industry groups such as manufacturing, wholesale and retail trade, transportation and warehousing, and information services spent 2023 adjusting to more normalized levels of demand after seeing artificially high demand during the pandemic.
On the flip side, industry groups such as leisure and hospitality services, education and healthcare, and government have been playing catch-up to the shifts in consumer demand. It would be natural to expect them to be leading in hiring. In fact, all three industry groups remain below their pre-pandemic employment trends, suggesting employment gains will likely continue into 2024.
Employment growth at the industry level in 2024 will likely remain disparate as the economy continues to move towards its new normal. This uneven performance can easily be interpreted as weakness; however, the key question to ask is not “where are we?” but instead “where are we relative to where we should be?” After a few volatile years, these industry groups should find appropriate levels of employment to service current demand. Then broader economic growth and other long-term trends will take over as the drivers of future employment gains.
Little to No Job Growth in Most Industries; What About Workers Comp Premium?
Employment growth is just one part of the bigger picture for workers compensation, and while it has slowed, wage growth has remained strong, supporting payroll growth. Private sector employment growth of 1.5% in 2023 combined with average weekly wage growth of 3.8% boosted payroll growth by 5.4% for the year, above the pre-pandemic average of 4.6% per year. While wage growth has slowed from its peak, it remains solidly above pre-pandemic growth rates and has reason to remain elevated in 2024. A number of factors—union activity and newly negotiated contracts, minimum wages rising in 22 states,Raises from Coast to Coast in 2024, Yannet Lathrop, National Employment Law Project, December 26, 2023. and inflation remaining top of mind for workers—will likely continue to put upward pressure on wage growth.
At an industry level, the payroll picture looks much healthier than the employment picture. Thanks primarily to continued elevation in wage growth, nearly all sectors experienced payroll growth close to or above 5% in 2023. Mining and logging (energy and natural resources), construction, and leisure and hospitality services (restaurants) all saw above-average payroll growth through a combination of strong employment and wage gains. While employment gains have slowed, stopped, or reversed altogether across most industries, these trends have not had a material impact on the wage growth picture, and payroll growth remains broad-based with just two lagging industry groups.
Retail trade and information services saw noticeably weaker payroll growth in 2023 than other industries. The information services sector was the exception where solid wage growth was unable to offset a large decline in employment. Despite the decline, employment in information services remains above its pre-pandemic trend because of the surge in hiring that took place during the pandemic. After declining through most of the year, information services returned to growth in the fourth quarter, trending up to end the year. While it’s too early to tell whether employment levels have returned to a more balanced state, the proximity to the pre-pandemic trend and return to growth in the fourth quarter suggest that the worst may be behind us for the information services industry.
Retail trade is a more interesting industry because the weakness in payroll growth stemmed from both lackluster employment and wage growth. The employment weakness was expected given the shift in demand away from goods towards services and the shrinking state of retail employment prior to the pandemic. But the wage component may have been unexpected given the wage increases seen by lower wage workers in other industries. A dissection of average weekly wage into its base components of average hourly earnings and average hours worked shows that while wage growth for the sector has indeed remained above its pre-pandemic trend, hours worked has trended downward since 2021. This weaker trend in the retail sector’s payroll growth may also persist into 2024 as consumer preferences normalize post-pandemic.
As we begin 2024, opinions on the direction of the labor market are diverse. Some forecasters are still predicting a recession, while others have solidified their predictions for a soft landing. The labor market will likely see increased media coverage as we enter the presidential election cycle as well. Employment gains slowed in 2023 from 2022; however, overall payroll gains, a key metric for workers compensation, remained robust. Additionally, the 2023 labor market looks solid when compared to pre-pandemic growth trends, and it appears much more “normal” than the past few years. At the industry level, job gains (or lack thereof) make sense when considering where each industry is in its current recovery stage and how that industry was trending before the pandemic. We will continue to monitor the details of the labor market and publish monthly insights for the workers compensation industry.